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Discount rating at clothing-to-homewares giant is a buying opportunity

We believe fallen stock market darling Next (NXT) could soon be back in favour. Get in now while the stock remains unloved with many investors at £50.

We’re encouraged by in-line half-year results (14 Sep) and upgraded profit guidance following  a promising start to the third quarter and the absence of any further deterioration in the consumer environment during the past six months.

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Over the worst?

We flagged a buying opportunity at the best-in-class jeans-to-jackets purveyor at £39.80 in our summer examination of the retail sector, highlighting Next’s management nous and impeccable cash returns pedigree. That proved to be a good call.

The £7.42bn cap’s results for the half to July showed a 9.5% drop in profit before tax to £309.4m amid tough clothing market conditions and a ‘marked divergence’ in performance between physical stores and online arm Next Directory; Next Retail sales fell 8.3%, Next Directory revenues rose 5.7%.

Flagging improved product ranges ahead of Christmas, chief executive Simon Wolfson also explained that ‘our performance in the last three months has been encouraging on a number of fronts’ and ‘prospects going forward appear somewhat less challenging than they did six months ago’.

Accordingly, Next modestly upgraded its full year sales and profit guidance, with the profit before tax range upped from £680m to £740m to between £687m to £747m, while also re-starting its share buyback.

Simon Wolfson - Jan 16

Simon Wolfson

Not everyone is enthusiastic

Berenberg thinks you should sell the stock. Its analysts argue the rise of e-commerce has increased choice, product and price transparency for shoppers resulting in ‘market share decline for Next due to its lack of differentiation’, while the retailer’s store estate ‘has become a burden, lowering its capacity to invest in product and online’.

Wolfson doesn’t concur with those arguing retail shops will be more of a liability than an asset in the future: ‘Firstly, our store portfolio looks set to remain profitable and strongly cash generative for many years to come. Secondly, our shops are an important part of our online service to the increasing number of customers who collect and return their orders through our stores.’

The retail division’s high margins, short lease terms, profitable space expansion and likely rent deflation all underpin its longer-term future, even as the shift online continues.

Next is one for patient investors, in our opinion. For the year to January 2018, Numis Securities forecasts a drop in pre-tax profit to £715m (2017: £783.3m) ahead of £702.5m in 2019.

Based on this year’s 402p earnings forecast and 158p dividend estimate, a prospective PE of 12.4 and 3.2% yield look appealing.


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